42 Pages Posted: 12 Aug 2015 Last revised: 15 Jul 2016
Date Written: August 10, 2015
We show that most hedge fund managers are passive, not active. Active management should be manifest through nonlinear exposure to the systematic risk factors that drive hedge fund returns. In order to demonstrate managerial skill enhanced performance should accrue as a consequence of active management. Using generalized additive models we find that approximately two-thirds of hedge funds exhibit only linear factor exposures and hence are “passive”. What’s more such “passive” managers tend to outperform “active” managers. Finally, we also show that many “active” managers, despite initial nonlinear risk exposures, eventually become “passive”.
Keywords: Hedge Funds, Generalized Additive Models, Passive
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